5 Advantages of Using a Letter of Credit
If your SME carries out overseas business transactions regularly, a letter of credit could be a godsend – whether you’re a buyer or seller. Here’s how a letter of credit (LC) could help your SME.
1. It reduces the risk of non-paying buyers
A LC from a bank guarantees that a seller will receive payment as long as certain conditions are met. In the event that a foreign buyer changes or cancels an order for example, a letter of credit ensures that the seller will still get paid by the buyer’s bank for the shipped goods, thus reducing production risk. A LC is also a safeguard against situations where a buyer refuses to pay for goods, or if a buyer goes bankrupt.
2. It helps buyers prove their solvency
If your SME needs to make an important purchase – whether of inventory, equipment or more – a letter of credit (LC) serves as proof to your supplier that you will fulfill your payment obligations. This is especially valuable if your business needs supplies or equipment on a tight schedule, and you absolutely cannot afford any transaction-related delays.
3.You can customise your LC
The great part about a LC is that they are usually highly customisable – meaning that the buyer and seller can work out a mutually acceptable set of payment terms for a particular transaction. If a different set of payment terms are required for a separate business transaction, the buyer’s bank can customise a different agreement for that purpose. A LC also gives overseas buyers the flexibility of deciding when shipment of goods should take place.
4. It helps sellers manage their cash flow
Aside from guaranteeing payment, a LC ensures payment arrives on time. This is particularly important if there is a significant time lag between the delivery of goods and payment – especially in the event of deferred payment. Having a LC in place will ensure sellers receive payment on time, which can go a long way in helping them manage their cash flow. Furthermore, sellers can obtain financing between the shipment of goods and receipt of payment, which can provide an additional cash boost in the short term.
5. It is quick to secure
If you need to carry out a big purchase in a hurry, fret not – applying for and securing a letter of credit can be done in a jiffy. You can apply online for a LC with DBS, and your application will be processed on the same day as long as your paperwork is submitted by 6pm. If you’re an existing DBS customer, you can enjoy even greater convenience by applying for your LC through the IDEAL platform.
For more information on how you can apply for a LC for your SME, reach out to DBS BusinessCare at 1800 222-2200 or +65 6222 2200.
Reassure your buyers or sellers of payment no matter what happens with our Banker's Guarantee / Standby Letter of Credit (SBLC).
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